Tax Week in Review for Week ending September 23, 2016

Tax Legislation

 H.R. 5946 – United States Appreciation for Olympians and Paralympians Act of 2016

    • To amend the Internal Revenue Code of 1986 to exclude from gross income any prizes or awards won in competition in the Olympic Games or the Paralympic Games.
    • Since being introduced on September 7th, the bill has been modified to limit the exclusion of income:
      • To taxpayers with less than $1,000,000 of adjusted gross income ($500,000 for taxpayers filing as married filing separately)

The full text can be seen here: H.R. 5946


H.R. 3957: Emergency Citrus Disease Response Act of 2016

  • Purpose: To amend the Internal Revenue Code of 1986 to temporarily allow expensing of certain costs of replanting citrus plants lost by reason of casualty.
  • Changes IRC Section 263A(d)(2) to include an expense allowance for replanting citrus plants last to casualty “Buchanan’s Emergency Citrus Disease Response Act will make it less costly for growers to replace trees damaged by citrus greening, an incurable bacterial disease that has infected 99 percent of Florida’s commercial citrus groves.* “

The full text can be seen here: H.R. 3957


H.R. 5719: Empowering Employees through Stock Ownership Act

  • Purpose: To amend the Internal Revenue Code of 1986 to modify the tax treatment of certain equity grants.
  • Since its introduction on July 11th, 2016, language has been added or modified. Per the CBO statement regarding the bill:
    • “H.R. 5719 would amend the Internal Revenue Code to allow certain employees to defer for up to seven years the recognition of income on compensation paid to them in the form of certain company restricted stock units or stock options. Under current law, employees must generally include such compensation in taxable income for both income and payroll tax purposes, in the case of stock grants, when they become substantially vested or, in the case of nonqualified stock options, when they exercise the option. At the same time, the business can take an equal deduction for compensation paid.”

The full text can be seen here: H.R. 5719


H.R. 5523: Restraining Excessive Seizure of Property through the Exploitation of Civil Asset Forfeiture Tools Act

  • Purpose: To amend title 31, United States Code, to prohibit the Internal Revenue Service from carrying out seizures relating to a structuring transaction, unless the property to be seized derived from an illegal source or the funds were structured for the purpose of concealing the violation of another criminal law or regulation.
  • Typically, deposits greater than $10,000 are to be reported to the IRS and can cause delays and interruptions to businesses that deal primarily in cash. This bill is to address the IRS seizure of assets and require a probable cause for such seizures.
  • Passed by the House, to be sent to the Senate next.

The full text can be seen here: H.R. 5523


Opinions, Decisions & Rulings Released this Week


         Issue: Deductibility of employee welfare benefit plan under Section 419(b)

  • Corporation adopted an employee welfare benefit plan that was intended to comply with Section 419A(f)(6), whereby it was to be part of a 10+ employer benefit plan that did not maintain an experience rating on individual employees.
  • Plans qualifying under Section 419A(f)(6) are not subject to the deductibility limits of Section 419(b).
  • The corporation contributed $450,000 to the plan. The money was used to buy a single payment life insurance policy on the life of the corporation’s sole shareholder\employee.
    • Decision: The taxpayer failed to inquire if the plan had 10 or more employers, and, in fact, it did not. The court also found the plan included language with regard to reductions of benefits if disability payments were made – this was effectively an employee experience rating. Deduction of $450,000 was denied.

The full text can be seen here: T.C. Memo. 2016-174



           Issue: Deduction allowed for charitable contribution under Section 170

  • Taxpayer, an LLC, owned property that overlooked a dam owned by the county. In opposition to the county’s request that the land not be developed, taxpayer built luxury homes on the property.
  • As a result of its disputes with the county, the LLC sold the property to the county. With valuations of both $1.5MM and $2.MM for the property in question, taxpayer reported a charitable contribution deduction for the difference of the $1.5MM valuation and the amount received from the sale.
  • IRS denied the deduction, claiming 1) taxpayer had not attached a properly prepared Form 8283 (lack of signature from second appraiser) and 2) IRS prepared its own appraisal indicating the property’s FMV = sale price.
  • Decision: Tax court held that the Form 8283 continues to only have a single signature line and that the signatures of the 2 appraisers on the attached appraisals were sufficient. Further, the $2MM appraisal was reasonable and entitled taxpayer to an additional charitable deduction.

The full text can be seen here: 147 T.C. No. 10



Issue: Were distributions received from a deferred compensation plan or from a qualified accident & health plan, excludable under Section 105(c) as payments not related to the absence of work?

  • Law firm, owned by the taxpayer (Barnhorst), engaged a financial advisor to write an insurance policy for the benefit of the taxpayer.
  • The court noted that the funds were deposited to a brokerage account and that was an unusual feature of the policy – one that had its own brokerage account.
  • Various benefits were offered under the plan, but the one in question pertained to “catastrophic disability.” Benefit payouts were the same, equal to 97% of the cash value in either lump-sum or periodic payments, regardless of disability.
  • Typically, qualified health and accident plans allow distributions for actual medical expenses and compensation for specific injuries or illness.
  • Decision: Payout was based on a “triggering event” rather than specific illness or injury. Court held that the distributions were deferred compensation.

The full text can be seen here: T.C. Memo 2016-177


Exelon Corp. v. Commissioner, 147 T.C. No. 9

Issue: Did the sale-leaseback arrangements entered into by taxpayer qualify as Section 1031 transactions, allowing for the deferral of gains derived from its power plant sales?

  • Exelon (E) sold its fossil fuel power plants in Northern Illinois for $4.8 billion, with a reported gain of $1.6 billion. Upon sale, E entered into a series of sale-leaseback arrangements for other power plants with a strategy to qualify as like-kind exchanges, allowing for a deferral of gains under Section 1031.
  • Using funds from its asset sales, E purchased 2 power plants from unrelated 3rd parties and leased them back to the sellers. Sellers paid rent to E for the use of the power plants and E deducted depreciation, interest and transaction costs.
  • The structure of the transactions were challenged by the IRS as loans, secured by the properties in question, rather than true lease arrangements. With the expectation that the sellers would exercise their options to retain the properties at the end of the lease periods, E did not retain the risk and burden of ownership. Accordingly, these were loans, rather than lease agreements.
  • Decision: Tax court agreed with the IRS. The sale leaseback agreements were financial instruments, not qualifying as like-kind exchange assets under Section 1031. Accordingly, result was the inclusion of OID income, a disallowance for depreciation and related expenses and the taxation of the original gain of $1.6 billion.

The full text can be seen here: 147 T.C. No. 9


COLLODI v. COMMISSIONER – T.C. Summary Opinion 2016-57

Issue: Is taxpayer entitled to deduct unreimbursed employee expenses?

  • Taxpayer is an employee of a drilling company and is moved, as needed, between various work sites in Southern California, with a permanent residence in Paradise, CA.
  • Taxpayer spent 2011 working 3 sites, staying in hotels when working and returning to his residence between assignments.   Hotel expenses were reimbursed by his employer.
  • Using notes and work calendar from taxpayer’s records, tax preparer deducted a.) mileage for daily round trips to site from hotel; b.) meals and incidentals incurred during trips and c.) miscellaneous tools and expenses of the job.
  • Under Section 162(a)(2), travel expenses, including meals and lodging, are deductible – when away from home in pursuit of a trade or business. A temporary assignment away from one’s home may qualify for a deduction, but, as described in Section 162, any employment that is greater than 1 year is not considered to be temporary.
  • Under the circumstances of his employment, the IRS found that the taxpayer’s residence was where he was employed and not where his home was located. His employment was greater than 1 year and the need to move between sites also meant a shift in his tax home for each move.
  • Decision: Tax court agreed with the IRS. Taxpayer was not “away from home” as described and required under Section 162(a)(2) to deduct his travel expenses.

The full text can be seen here: T.C. Summary Opinion 2016-57

TAM 201638022 – Permanent Machinery Qualifies as Real Property under Section 199.

  • Taxpayer (a national construction contractor) installed, renovated, and construction of substantial specialized systems. Work involved machinery installations to buildings or to realty that were to remain in place for an indefinite time.
  • Taxpayer asked for advice as to whether such construction and attachment to realty would qualify these projects as construction of realty and qualify as domestic production gross receipts (DPGR).
  • The National Office advised that revenue from the described installations qualified as DPRG and property to be included in as an inherently permanent structure—and thus as real property for purposes of determining taxpayer’s DPGR—is not removed from that category if it is also machinery.

The full text can be seen here: TAM 201638022

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